2023 Emerging Trends in Real Estate (December 2022 Insights)
As 2022 comes to a close, now is a good time to start looking forward to what 2023 may have in store for real estate syndications.
With that in mind, we have outlined and summarized the key emerging trends (based on a recent report published by PWC) that we believe will have the most impact on the real estate syndication industry in 2023.
Trend #1 - Sales Volume and Pricing Are Normalizing
After several years of “pandemic-fueled market distortions,” pricing is returning to more normal levels, according to the study. Prices of “most assets are declining as cap rates rise and transaction volumes fall from record levels, while rent gains for other properties are merely moderating as demand returns to more sustainable levels.”
Trend #2 - Capital Is Moving to the Sidelines
With rising interest rates and a looming recession, “fewer investors and lenders will be providing capital for assets,” according to the study. There is still investor interest, but it has declined.
Uncertainty about pricing is leading to hesitancy. As one senior investment banker said in the study, “transactions are being done at cap rates that are anywhere from 25 to 75 basis points wider than they were — but there is not any conviction that these are the right levels.”
The core issue for many investors is how long the Fed will keep raising rates. The good news is that there are few signs of distress and few real estate professionals expect a liquidity crunch in property markets. “Balance sheets are generally strong, leverage is low, and values have not fallen very far, so few assets are underwater with their debt,” said the study.
Trend #3 - Housing Is Too Expensive for Too Many
Rising interest rates will worsen the housing crisis. Single-family home prices are near record levels, and higher mortgage rates make ownership less attainable. That means increased demand for rental housing, but demand is outstripping supply. Mass migration to cheaper markets is making them less affordable.
Trend #4 - Give Me Quality, Give Me Niche
Real estate capital markets are becoming more bifurcated between the favored and the scorned as investors, lenders and developers become more selective, seemingly preferring three distinct types of opportunities:
Major product types with very strong demand fundamentals like industrial and multifamily.
Among sectors experiencing significant disruption like retail and office, investors are comfortable with the highest quality assets in the best locations.
“Niche” assets, such as student housing and single-family rentals are appealing.
Trend #5 - Rewards — and Growing Pains — in the Sun Belt
Investors will still gravitate to the Sun Belt, but the report acknowledges that growth has brought “big-city problems,” like congestion and housing affordability, to these formerly “18-hour cities.” Infrastructure growth has not kept up with population growth.
At the same time, “lower tax rates and perceived lighter regulatory burden” make these markets appealing, said the report. “But more relaxed taxation and regulation come at a cost, as evidenced by the challenges of accommodating massive population inflows.”
The report also identifies the top 10 “U.S. Markets to Watch” for overall real estate prospects:
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